2017 (8) TMI 382 - HC - Income Tax

Entitlement for deductions as claimed under Section 80 IB and 80 HHC - adherence to four conditions contained in Section 80 1B(2) - industrial undertaking manufactures or processing the articles or things - assessee dealing with the software - number of employees recruited - Held that - Tribunal, after having carefully perused the record, rightly concluded that since case relates to assessment year 2001-02, the number of employees at the time of survey on 19.2.2002 is not important since the previous year relevant to the Assessment year under consideration ended on 31.3.2001, as such, the employees in the year ending on March 31, 2001 were required to be considered to decide whether the assessee employed the requisite number of workers in the industrial undertaking or not. Learned Tribunal, after having peeped into the record, carefully examined/analyzed evidence adduced on record by the assessee vis- -vis order having been passed by Assessing Officer and concluded that the majority of the employees were having the technical educations who were engaged in the manufacturing process i.e. in development of the software and it is not necessary that each and every employee alone should do all the works in the manufacturing process. Assessing Officer failed to place on record any material to substantiate that assessee had not employed the workers as mentioned in the list dated 31.1.2004 for the period relevant to the assessment year under consideration and merely on the basis that the old employees were not there at the time of survey, rejected the claim of assessee for deduction under Section 80IB. Mumbai Bench C in the case of ISBC Consultancy Services Ltd. vs. DCIT (2002 (8) TMI 840 - ITAT MUMBAI) has already held that process of customization of software amounts to manufacture. In case referred above, learned Income Tax Appellate Tribunal held that rendering standard software operational by adding new programs, keeping in view the commercial needs, requirement and applications to be implemented by the customers, would amount to manufacture and further for the purpose of Section 10A, since manufacture includes any process and as such customization of software would be eligible for the deduction under Section 10A. Learned Appellate Tribunal in the aforesaid case has categorically held that development of software falls within the definition of production as defined under Section 10A and 10B. It also emerge from the record that similar view has been taken by learned Income Tax Appellate Tribunal Hyderabad Bench B in the case of Infotech Enterprises Ltd. vs. JCIT, (2002 (5) TMI 217 - ITAT HYDERABAD-B ). Learned counsel representing the appellant-department was unable to dispute aforesaid findings returned by learned Income Tax Appellate Tribunals Mumbai and Hyderabad Benches in cases referred above and as such ratio laid down in the aforesaid cases were rightly applied in the instant case by the learned Income Tax Appellate Tribunal Chandigarh Bench. Though this Court, after having gone through material adduced on record by appellant-department vis- vis impugned order passed by learned Appellate Tribunal, is of the view that no substantial question of law arises for determination of this Court, but otherwise also, as has been discussed hereinabove, learned Tribunal has correctly dealt with each and every aspect of the matter. This Court, after having carefully examined the text of questions of law formulated in the appeal vis- -vis findings recorded by learned Appellate Tribunal, find that questions framed by the appellant-department are pure questions of fact, which definitely cannot be looked into in the present proceedings, and as such present appeal deserves to be dismissed. Section 260-A of the Income Tax Act, 1961 provides that An appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal before the date of establishment of the National Tax Tribunal, if the High Court is satisfied that the case involves a substantial question of law. - Decided in favour of assessee

Issues Involved:
1. Eligibility for deduction under Section 80 IB of the Income Tax Act.
2. Fulfillment of conditions specified in Section 80 IB(2)(iv) regarding employment of workers.
3. Maintenance of separate books of account as per Section 80 IB(13) read with Section 80 IA(5).
4. Evidentiary value of statements recorded under Section 133A(3)(iii) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80 IB of the Income Tax Act:
The core issue was whether the assessee was engaged in the manufacture of encryption software, making it eligible for deductions under Section 80 IB. The Tribunal concluded that the assessee fulfilled all conditions under Section 80 IB(2) and was thus entitled to the deductions. The assessee imported hardware and software, customized the software, and integrated it with the hardware at its premises. The High Court upheld the Tribunal's decision, referencing the Supreme Court's ruling in Tata Consultancy Services vs. State of Andhra Pradesh, which defined software as "goods." The Court also noted the CBDT Circular dated 7.10.2005, which clarified that software should be regarded as goods, thus supporting the Tribunal's interpretation that customization of software amounts to manufacture.

2. Fulfillment of Conditions Specified in Section 80 IB(2)(iv) Regarding Employment of Workers:
The Tribunal examined whether the assessee employed ten or more workers in the manufacturing process, as required by Section 80 IB(2)(iv). The Assessing Officer had disallowed the claim, noting discrepancies in the number of employees during a survey. However, the Tribunal found that the relevant period for assessment was the year ending on March 31, 2001, not the survey date. It concluded that the assessee employed the requisite number of workers based on the evidence provided, including wages paid to temporary and part-time workers. The High Court agreed with the Tribunal's findings, emphasizing that the Assessing Officer had accepted the expenses related to these workers as genuine.

3. Maintenance of Separate Books of Account as per Section 80 IB(13) read with Section 80 IA(5):
The Tribunal addressed whether the non-maintenance of separate books of account justified the rejection of the deduction claim. It held that the failure to maintain separate books did not invalidate the claim, as the primary condition was the fulfillment of manufacturing requirements and employment of the requisite number of workers. The High Court upheld this view, noting that the Tribunal had correctly interpreted the provisions and the evidence on record.

4. Evidentiary Value of Statements Recorded under Section 133A(3)(iii) of the Income Tax Act:
The Tribunal considered whether statements recorded under Section 133A(3)(iii) during a survey had any evidentiary value. It referred to the Kerala High Court's ruling in Paul Mathews and Sons v. CIT, which stated that statements recorded under Section 133A do not have evidentiary value as they are not recorded under oath. The High Court concurred, emphasizing that the Assessing Officer had not provided substantial evidence to counter the assessee's claims.

Conclusion:
The High Court dismissed the appeal, affirming the Tribunal's judgment that the assessee was entitled to deductions under Section 80 IB. It concluded that no substantial question of law arose, as the Tribunal had thoroughly examined the facts and correctly applied the relevant legal principles. The Court emphasized that the issues raised were factual and had been appropriately addressed by the Tribunal.

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